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Monday, March 04, 2013

Elan Corp. PLC has been engaged in a slow motion strip-tease over the past five years; it has now shed so many assets that it may soon disappear entirely. On Feb. 25, Royalty Pharma fielded an $11/share, $6.5 billion bid for the company. That was a 12.7% premium over the volume weighted average closing share price for Elan between Feb. 6 and Feb. 15. Elan’s directors, predictably, said the offer was too low. But the offer may be fitting in that it reflects the notion that Elan, once a CNS R&D focused biopharma, is now a royalty-generating cash shell.

The purpose of the asset sales was to reduce Elan’s runaway debt so it could foray into new approaches to treating AD and other CNS disorders. On the eve of the Janssen deal, it was carrying $1.7 billion in debt. By the time of the Neotope spinout, the goal was to position the company as a takeout target for a buyer interested in Tysabri’s revenue stream.

Tysabri partner Biogen Idec Inc. struck on Feb. 6. Elan secured a $3.2 billion upfront payment and a graduated royalty on Tysabri sales beginning at 12% in the first year, rising to 18% on sales below $2 billion and 25% on sales over $2 billion. Moreover, Elan’s royalties include all future indications, both MS and non-MS. Tysabri is being studied in secondary-progressive MS, and Biogen has indicated it may look into the drug as a treatment for stroke.

Elan told analysts in its same-day year-end 2012 earnings call, that it would spend its windfall on acquiring “income-producing assets,” despite not having a sales and marketing organization.

Elan’s recent history is reminiscent of PDL BioPharma Inc. Both companies have shed operating assets over the past five years, essentially reducing themselves to financial plays that relied on significant product royalties. Both companies also told shareholders that they would morph into commercial product companies.
But PDL made the transition because the clock on its patent estate – which gave it a slice of revenue from some of the most lucrative antibody franchises of the past decade – was running out. It hired a couple of dealmaking veterans and told its shareholders that if it didn’t find any revenue-bearing assets by some point in 2014 it would wind up shop. A January 2013 corporate presentation on PDL’s web site indicates that in the second half of 2012 the company invested $115.8 million dollars in three life science companies.

It’s unclear why Elan wants to go back to being a product company, much less a non-neurology focused company. Unfortunately, the Street hasn’t bought into its latest plan for reinvention, giving Royalty Pharma its current opportunity. UPDATE: In an effort to fend off Royalty’s unwanted offer, on Monday March 4th Elan’s board approved a twice-yearly dividend to shareholders linked directly to Tysabri’s performance. Beginning in Q4 2013, shareholders would receive an initial 20% share of Elan’s Tysabri royalty.

As of this writing, no other buyers have come forward to bid up the price. Marko Kozul, biotech analyst at Leerink Swann, advised shareholders to accept the offer. Royalty Pharma is certainly a motivated buyer; in May 2012, it paid $761 million for part of the earn-out for the oral MS drug BG-12 payable to the former shareholders of Fumapharm AG, which Biogen acquired in 2006. Kozul calculates that BG-12 revenues will peak at around $4 billion in 2018 and the NPV for the total royalty stream, an undisclosed piece of which goes to Royalty Pharma each year, sums to $3.1 billion.

There isn’t a compelling reason for Elan shareholders to prefer management’s risky plan to simply cashing in at the modest premium that Royalty is offering. They are perfectly capable of investing the money themselves, and needn’t trust Elan to pick winning investments. Or to execute on its vision.

And talk about investment ideas, here’s a sampling of . . .

Jazz/Concert: Jazz Pharmaceuticals PLC is singing a happy tune now that it has secured a follow-on for its lead revenue driver, the narcolepsy drug Xyrem (sodium oxybate). The company announced Feb. 26 that it has inked a deal with Concert Pharmaceuticals Inc. to develop and commercialize a portfolio of deuterium-modified sodium oxybate compounds, including C-10323 ([A#14130227004]). The deal included an undisclosed upfront, as well as the potential for $120 million in milestone payments to Concert, which will handle Phase I development of C-10323. Should a product reach the market, Concert will be eligible for tiered double-digit royalties on worldwide sales.

Xyrem, a treatment for sudden muscle weakness and daytime sleepiness in patients with narcolepsy, accounted for 65% of Jazz’s total 2012 revenues. The drug, which has to be tightly controlled due to its potential for abuse, is covered by 10 patents that expire from 2019 to 2024, with other patent applications pending. But Jazz is already facing patent challenges for the drug, and its deal with Concert is one way to shore up the franchise. C-10323 is expected to have a better dosing schedule, longer half-life, greater efficacy in cataplexy patients, and fewer side effects than its predecessor. Oh and by modifying the drug with deuterium, Jazz gets to reset the patent clock. - Lisa LaMotta

Mylan/Agila Specialities: Quelling months of speculation, Strides Arcolab Ltd. finally sold its highly profitable injectibles arm Agila Specialties Pvt. Ltd. to U.S. generics giant Mylan Inc. for $1.6 billion cash and $250 million in potential milestone payments. Mylan toppled several global contenders, reportedly Pfizer, Otsuka Holdings Co. Ltd., and Novartis AG, among others, to clinch the unit that multiplied in size in less than five years by seizing opportunities from a raft of injectable oncology drugs in the U.S. Mylan valued Agila at 18.7x EBITDA of $86 million. Agila had revenues of $255 million through the end of December 2012. Carved out of Strides Arcolab in November 2010, Bangalore-headquartered Agila has been consistently rolling out copies of hard-to-make cancer drugs. Its prospects brightened further by a series of manufacturing and compliance lapses that dogged its competitors, adding fuel to speculation last year of an impending sale by Strides.

Mylan expects to double its injectibles business in the first year after the acquisition, and believes its specialty segment will grow 30% in 2013, execs said during the company’s Feb. 27 earnings call. The deal strengthens Mylan’s global presence and gains it entry into high-growth emerging markets such as Brazil. Roughly 40% of Agila's revenue comes from the U.S., and one-fourth comes from Brazil, with the balance coming from Europe, Australia, and other established and developing markets.- Vikas Dandekar

UCB Group/Biotie Therapies: Finland's Biotie Therapies Corp. is having a good week, brightening up a traditionally gloomy time of the year for Europe's most northerly residents. Not only did the EU clear its lead product, Selincro(nalmefene) for marketing by partner Lundbeck Inc. on March 1, but another collaborator, Belgium's UCB SA, appears so pleased with a Phase II Parkinson's therapy that it has asked Biotie to conduct Phase III studies on the compound. UCB took out an option on Biotie's investigational Parkinson's therapy, tozadenant, in 2010. The company has now exercised the option after the completion of a Phase IIb clinical trial, earning Biotie a fee of $20 million, the companies announced Feb. 26. Biotie also remains eligible to receive a further $340 million in milestone payments. But with Biotie now conducting Phase III trials on tozadenant instead of UCB, as laid out in the original agreement, Biotie will also receive further payments, in the low triple digit millions, to fund that work.

In return, UCB has worldwide exclusive rights to tozadenant, and will be responsible for manufacturing and commercialization. Tozadenant is a selective inhibitor of the adenosine A2a receptor, expressed in high levels in parts of the CNS, particularly the striatum, involved in controlling movement. The binding of tozadenant blocks the effects of adenosine at its receptor, thereby increasing the effects of dopamine, and also inhibiting the effects of glutamine at the mGluR5 receptor. Dopaminergic processes are already targeted by numerous marketed Parkinson's disease therapies. - John Davis

Janssen Biotech/Araxes Pharma: The Johnson & Johnson division Janssen Inc. has paid an undisclosed amount for an option to license exclusively an oncology program being developed by Araxes Pharma LLC. The decision point to exercise the option for the program, which is focused on an undisclosed target, will come after Phase I, says Araxes CEO and president Troy Wilson. Araxes is the first announced spin-out from Wilson’s Wellspring Biosciences, a self-described “drug-discovery incubator” in San Diego that Wilson and his former colleagues at Intellikine Inc. have created as an umbrella organization for what they hope will be multiple drug programs. It’s the latest asset-centric biotech development plan, in which individual programs are housed separately from their discovery platform to simplify deal-making and create cleaner tax structures for investors. Others include Inception Sciences Inc., Forma Therapeutics LLC, and Nimbus Discovery LLC.

“There’s no one-size-fits-all structure,” says Wilson. Intellikine, which sold to Takeda Pharmaceutical Co. Ltd.’s Millennium Pharmaceuticals Inc. division for up to $310 million in late 2011, specialized in PI3 kinase inhibitors. Wellspring is, in effect, the employee agency for Araxes and affiliates that might follow; Wellspring employees will do the R&D but the affiliates will own the patents, the cash from partnerships, and the regulatory responsibility. In addition to an upfront fee, Janssen will also pay Araxes R&D funding and potential milestones and royalties. - Alex Lash

Takeda/Resolve: The Japanese pharma has inked an option agreement with three-year old Seattle biotech Resolve Therapeutics LLC that will give the larger company a new addition to its immunology pipeline. Takeda agreed to pay $8 million upfront to Resolve to develop RSLV-132 for the treatment of lupus. Resolve is expected to take the drug through Phase Ib with a readout of data at the end of 2014. Once data is available on the drug Takeda will have the right to option it for further development. Resolve will then be eligible for an undisclosed option fee and for $274 million in milestone payments, as well as royalties on the marketed product.

Takeda has been trying to bulk up its immunology business since acquiring several COPD drugs through its acquisition of Nycomed Pharma AS. The company expects immunology to account for 12% of its R&D budget during the 2012 -2014 timeframe. It spent about $3.5 billion on R&D in 2011. For Resolve, the option would serve as an exit for investors. The company is not developing any other drugs and never had any intention of pursing an exit through IPO or sale of the company The biotech has only used about $3 million (of a $7.8 million raised over two rounds) in cash since its founding in 2010.- Lisa LaMotta

Cubist/Adynxx: For an up front payment of $20 million, Cubist Pharmaceuticals Inc. has acquired an exclusive option to buy Adynxx Inc. following the data readout of Adynxx’s Phase II trial for its lead drug, AYX1, an oligonucleotide treatment for post-surgical pain. Should Cubist exercise its option, it will pay Adynxx $40 million, plus development, regulatory, and sales earn-outs. The deal, announced Feb. 25, would expand Cubist’s acute care pipeline beyond its portfolio of antibiotics, including key revenue driver Cubicin. (Cubist also has rights to Hydra Biosciences TRPA1 inhibitor CB625, in Phase I for acute pain.) Administered once at the time of surgery, the Adynxx compound inhibits the early growth response protein 1 (EGR1), a transcription factor that triggers pain signals in the brain. This approach could reduce the need for pain medications and prevent acute pain from transitioning into chronic pain, said the company. The candidate is currently being tested in unilateral total knee arthroplasty to reduce movement evoked pain and to improve the rate and extent of functional recovery. Adynxx’ CEO Rick Orr was a co-founder of Cerexa Inc., which Forest Laboratories Inc. acquired in 2007 and more recently was COO of Corthera, which Novartis AG bought in 2010. - Wendy Diller

LEO Pharma/4SC Discovery: The psoriasis market has many drug makers just itching to get into it. The latest to move are Denmark-based Leo Pharma AS and German biotech company 4SC Discovery GmbH. The duo has entered a pact to jointly research, develop and commercialize a pill for treating inflammatory skin diseases like psoriasis. Leo Pharma will pay €1 million ($1.3 million) up-front to 4SC Discovery and additional funding for research and development. Leo Pharma will receive an exclusive option to license the worldwide marketing and commercialization rights of the compound. 4SC Discovery, a subsidiary of oncology and autoimmune specialist 4SC Group, will be eligible for a milestone payment of up to €3 million and further payments based on specific development milestones of up to €92 million along with double-digit royalties. - Sten Stovall

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